[Sisibibi] Why an Urgent 'Special Measure' Is Needed to Prevent a Hard Landing in Real Estate

Real Estate-Centered Nation Faces Sharp Asset Value Decline
Construction Company Bankruptcies and Financial Institution Impact

Amid growing concerns about a hard landing in the real estate market, many of the stringent regulations that have been weighing down the market are being lifted. The government is removing designated regulation zones and areas subject to the price ceiling system, while also significantly easing resale restrictions. The obligation to reside in the property after purchase is being abolished, and the 1.2 billion KRW price guarantee standard is being eliminated. Although caution still underlies the approach, the government appears to be actively defending the economy by stimulating the frozen buyer sentiment.

This marks a complete turnaround from the stance taken for a considerable period after the administration's launch, when it seemed to welcome the decline in housing prices. In fact, the government dismissed the recent downward trend in housing prices as a normalization process and repeatedly stated that it was "monitoring the current situation." While some measures were proposed, they had little effect on the completely frozen market sentiment. The regulatory easing implemented so far was largely reactive, carried out with an eye on the market.

Some voices still argue that housing prices need to fall further. However, the issue lies in the speed of the decline. Since the current administration took office, housing prices have plummeted in just a few months, erasing all gains made over the past two years. Such a rapid drop in housing prices, or asset values, can be devastating for Korean households. Korea is an exceptional case globally as a ‘real estate-centered country.’ In advanced countries, financial assets make up a larger portion of total assets, but in Korea, assets are excessively concentrated in real estate. According to the Bank of Korea, as of 2021, Korean households held 64.4% of their assets in real estate and 35.6% in financial assets. As asset values fall, debt rises and consumption bottoms out.

The second wave of impact is the risk of a cascade of bankruptcies among construction companies. With the subscription market frozen solid, sales rates have plummeted, drying up funding and increasing uncertainty in real estate project financing (PF). Construction company insolvencies can spread to financial institutions, creating a vicious cycle. As of the end of September last year, real estate finance exposure (the amount at risk of loss) reached 2,696.6 trillion KRW, equivalent to 125.9% of nominal GDP. This is an increase of 649.1 trillion KRW (31.7%) compared to the end of 2019, before the COVID-19 pandemic.

Although the new year has dawned, the real estate market remains bleak. The ‘record-breaking’ market crash of last year continues unabated, with no bottom in sight. The outcry over housing prices dropping by hundreds of millions of KRW and halving in just a few months is no longer heard from just one or two places. The market itself has frozen solid, with housing transaction volumes falling to half their previous levels and unsold units approaching 60,000.

Predictions that housing prices will fall further are nothing new. The Korea Research Institute for Construction Industry forecasts a 2.5% decline this year, while the Housing Industry Research Institute expects a 3.5% drop. A survey found that 8 out of 10 citizens anticipate a decline in housing prices this year. Amid this, even rental fraud targeting vulnerabilities in the market is rampant, plunging the market into chaos. This is why experts argue that bold shock therapy is needed to completely change the market sentiment, which has proven resistant to all remedies. Franklin D. Roosevelt’s ‘New Deal’?though endlessly criticized as a leftist policy?ultimately restored the U.S. economy from the Great Depression, becoming the only four-term president in American history.

This content was produced with the assistance of AI translation services.